Cost Accounting: How to Find the True Cost of Your Product or Service

11-13

No. In almost all cases, managers will likely tend to adopt the alternatives that will appraise their performance. Thus, they will pay attention to the measures that are adopted in performance evaluation processes (Alkhatib and Harasheh, 2012). However, if the chosen process does not focus on maximizing operating income or else minimizing expenses, the managers rely on the alternative that will maximize operating income and minimize costs.

12-32 Cost-Plus and Market-based pricing

Price per hour chargeable by Florida Temps as per Mason’s proposal

$18 per hour should be the applicable charge by Florida Temps

$19 price per hour maximizes the operating income

The price per hour proposed in the Manson’s proposals differs with that of maximizing operating income. The major cause of the difference is that variable costing and contribution margin income statement are different from absorption costing and traditional income statement (Shephard, 2012). In the traditional income statement, fixed overhead are allocated as periodic cost, and therefore they are allocated in the expenses they are incurred. On the other hand, under absorption costing fixed overhead are allocated to each unit. As a result, the overhead of the closing units is allocated in inventory which differs from variable costing.

13-35 Balanced Scorecards

The aim of Caltex’s approach is to explore “service-oriented customers” but only those who are ready to pay higher prices for the services offered. Since selling of gasoline commodity is spread in the market, Caltex’s intention is to focus on product differentiation of the services offered in its retailing stations.

Though the scorecard demonstrates the Caltex's strategy, it puts more emphasis on the process improvement measurements, market share, product quality, and financial success. All these factors will depend on product differentiation strategy and higher prices for the services (Bento and White, 2013). Notably, keeping aside other deficiencies the balanced scorecard is focusing on how to implement differentiation strategy of Caltex's product.

Since the balanced scorecard seems to be reasonably designed, one can conclude that Caltex’s 2011 strategy was successfully implemented. It seems to have covered all the targets regarding financial, learning and growth, and internal business (Kintner-Meyer, et al. 2014). However, it failed to indicate the market share target which covers the customer perspective. In this case, market share review is the keynote of overall gasoline market compared to the “service-oriented customers.” Similarly, the market segment is not a perfect scorecard measure thus missing this target may not have a significant effect.

Measurement of employees' morale in the balanced scorecard is essential, but it is unsuitable in the case of Caltex's. The Caltex strategies are primarily on the product and market rather than employees.

The key indicator that the Caltex did not achieve its market strategy is the missing customer’s perspective in the balanced scorecard. However, the reliability index of the gasoline and increase in the shareholders’ value indicates positive impact of the financial targets. Since the market segment is not a perfect scorecard measure thus missing this target plays an insignificant role in the Caltex's strategy.

Customer’s perspective and internal business perspective are interlinked in the balanced scorecard. Measures that are aimed at customers are translated to measures that are adopted by the firm in meeting customer’s needs. In other words, what customers derive from a business is the internal perspectives such as processes, goals, systems and decisions of the management. Thus, it is important to focus on the internal perspective which will enable the business to achieve customer’s perspectives and needs.

No, financial perspective should incorporate the measures of changes in the operating income of the business. Such a measure will be helpful in determining whether the strategies and other implementations are contributing overall improvement. Similarly, it will demonstrate profitability, growth, the value of the shareholders. Caltex's survival would be indicated by the cash flow, growth by sales growth, operating income by division, and lastly increased market share indicate the prosperity (Kaplan and Atkinson, 2015). However, due to the stiff competition of gasoline in the market, financial measures have no link with customer’s satisfaction, employee’s motivation and quality.

References

Alkhatib, A., & Harasheh, M. (2012). Financial performance of Palestinian commercial banks.

Bento, A., Bento, R., & White, L. F. (2013). Validating cause-and-effect relationships in the balanced scorecard. Academy of Accounting and Financial Studies Journal, 17(3), 45.

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Shephard, R. W. (2012). Cost and production functions (Vol. 194). Springer Science & Business Media.

Viswanathan, V., Crawford, A., Stephenson, D., Kim, S., Wang, W., Li, B., ... & Kintner-Meyer, M. (2014). Cost and performance model for redox flow batteries. Journal of Power Sources, 247, 1040-1051.